Monday's Market: Blue-Chips Manufacture a Rally on NAPM Data

(Updated from 4:21 p.m. EDT)

As if on cue, the second half of the year kicked off with nascent signs of an economic recovery in the form of stronger-than-expected data on the manufacturing sector.

The National Association of Purchasing Management's purchasing managers' index for June showed that the manufacturing sector was contracting less severely than had been expected. Manufacturing has been one of the hardest-hit areas of the economy this year.

The news brought relief to blue-chip stocks, even 3M (MMM), which warned today that its second-quarter earnings would be hurt by weakness in the economy. The Dow Jones Industrial Average closed near its highest levels of the day, up 91.32 points, or 0.9%, to 10,593.72. (After the market closed, DuPont (DD) became the second Dow component to issue an earnings warning today. The company said it expects per-share earnings of 35 cents to 45 cents; analysts expected per-share earnings of 53 cents.)

"3M is a perfect example of how the market is betting on an economic recovery," said Peter Boockvar, market strategist at Miller Tabak. The stock opened down $4.85 to $109.25 before the PMI was released. It finished up $3.16, or 2.8%, to $117.26. But Boockvar added: "It's going to take months before investors are convinced of a recovery."

The PMI came in at 44.7, above the 42.8 expected and May's 42.1 reading. The June number marks the indicator's highest level since November 2000. The NAPM signals expansion when above 50 and contraction when below it. (A reading of 42, economists say, indicates recovery.) Today's report comes on the heels of better-than-expected data on manufacturing in the Midwest on Friday.

As investors shifted their attention to blue-chip stocks, technology issues fell. The Nasdaq Composite , which registered its first positive quarter since March 2000, fell 11.8 points, or 0.55%, to 2148.7. The broad market S&P 500 Index gained 12.35 points, or 1.01%, to 1236.72, while the small-cap Russell 2000 fell 14.25 points, or 2.78%, to 498.39 in the first session after the index was rebalanced.

Volume was light ahead of the Fourth of July holiday. The market closes at 1 p.m. EDT on Tuesday. "Not too many investors are playing the game today," said Bob Basel, director of listed trading at Salomon Smith Barney. "A lot of investors are out this week."

For those who stuck around, concerns about earnings warnings didn't exactly go away, despite the good economic news. "If [the market] continues to get warnings from companies that were expected to rebound in the fourth quarter, it will be difficult to digest," said George Rodriguez, senior vice president at Guzman, a broker-dealer headquartered in Miami.

Over the past four weeks, company after company has warned that second-quarter earnings and sales will fall short of forecasts. Wall Street is now hoping that corporate earnings will accelerate in the fourth quarter of this year or early next year.

Optimism that an economic recovery, which tends to precede earnings turnarounds, might come later this year was reignited by the Federal Reserve's sixth interest-rate cut of the year last Wednesday. The Fed dropped the federal funds lending target by a quarter-point to 3.75% and indicated that it may be winding down its rate-cutting program.

This morning's personal income and consumption data showed that consumers continue to spend despite income weakness. Income grew a 10th of a percent more slowly than was expected, while spending rose a 10th of percent faster than was expected.

Once again, the GE (GE)-Honeywell (HON) deal was in the spotlight. According to press reports, the companies may cancel the merger before the European Commission rejects it, as the regulatory body is expected to do tomorrow. GE gained $2.97, or 1.5%, to $50.20, while Honeywell fell 88 cents, or 2.5%, to $34.11.

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Market Internals

Market Internals
Exchange	Advancers	Decliners	New Highs	New Lows	Volume
New York Stock Exchange	1,600	1,471	141	16	1.1 billion
Nasdaq Stock Market	1,555	2,234	96	60	1.5 billion

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Most Active Stocks

NYSE Most Actives
Company	Shares Traded
Lucent (LU)	27.9 million shares
General Electric (GE)	23.2 million shares
Honeywell (HON)	16.7 million shares

Nasdaq Most Actives
Company	Shares Traded
Cisco (CSCO)	54.9 million shares
Intel (INTC)	38.4 million shares
Microsoft (MSFT)	35.6 million shares

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